Next Monday will mark a new era of competition in Australia’s equity market with the launch of alternative trading system Chi-X Australia. While the Australian Securities Exchange (ASX) has embraced the impending multi-market environment, the full impact of new market integrity rules (MIRs) may take months if not years to unfold.
“We will monitor the impact of competition very closely,” Richard Murphy, general manager, equity markets, ASX, told theTRADEnews.com. “This includes the effect of competition on overall liquidity levels, the order-to-trade ratio and average trade size. Furthermore, if the market becomes dominated by high-frequency trading (HFT), the proportion of trading that migrates to the dark will need to be watched.”
Murphy said buy-side traders will also pay careful attention to the impact of competition on execution performance, weighing the benefits of narrower spreads and reduced exchange fees against higher connectivity costs, the expected increase in HFT and rate at which brokers pass cost savings back to clients.
The dynamics of the Australian market have already changed significantly in recent years, with the influence of HFT already evident. According to Murphy, the ASX’s average order-to-trade ratio has increased to around 10-12 this year from seven in 2010, itself a sharp increase from three in 2009. Average trade size has plummeted from A$12,000 a year ago to between A$7-8,000 currently.
Among a raft of enhancements made by the ASX in preparation for competition, Murphy considers its low-latency PureMatch trading platform as the one of the more direct responses to Chi-X Australia.
Scheduled for launch on 28 November subject to regulatory approval, PureMatch is geared towards HFT and will only offer limit and market orders, with no dark trading or auctions. The ASX is currently consulting with HFT firms on pricing for the platform.
“PureMatch forms part of our response to competition along with other initiatives such as lower trading fees and new order types,” said Murphy. “If there is demand for a multi-market environment, we want to meet this demand and the needs of high-frequency traders.”
The ASX lowered its trading fees last year from 0.28 basis points to 0.15 bps.
Chi-X Australia will be supported by more than 20 brokers from launch, initially offering trading in six stocks, comprising BHP Billiton, CSL, Leighton Holdings, Origin Energy, QBE Insurance and Woolworths. The alternative trading system will use a maker-taker model, charging 0.12 basis points for aggressive orders and 0.06 bps for passive orders.
While the upheaval of the equity Australian market is only days away, Murphy expects change to be gradual, partly due to the time of year the changes are taking place (Australia’s year-end summer brings low volumes) and the scale of modifications that will be required by market participants.
“There is a lot for market participants to do when you consider the launch of PureMatch, Chi-X Australia and the changes brought in by the MIRs,” he said. “Even HFT firms that are already connected will need to tune their systems to the new environment. This is new for everyone, so we anticipate a slow start.”
As well as permitting the launch of alternative venues such as Chi-X Australia, the Australian Securities and Investment Commission’s MIRs include details for ensuring an orderly and harmonised market following the introduction of competing venues, such as pre- and post-trade transparency obligations, best execution rules, and order control and cancelling systems.
ASIC is already consulting on the next round of market reforms via its CP168 paper. The document considers the possibility of introducing market making contracts for liquidity providers, pre-trade transparency thresholds for block trades and price improvement requirements for dark trades below block size. The paper also recognises that the growth of dark trading may have to be limited, and proposes a threshold of A$50,000 for all passive dark orders, if non-displayed liquidity below block size grows by 50% in three years.
“We think CP168 is a sensible and we are happy ASIC is addressing these issues, including the potential rise of dark trading,” said Murphy.
He is also bullish on the Australian market’s ability to handle fragmented markets, noting that market participants, infrastructure operators and regulators have learned from monitoring similar reforms in US and Europe.
“ASIC knows as much as [US regulator] the Securities and Exchange Commission now, even before the arrival of a multi-market environment, so we can expect it to take swift action if market quality diminishes as a result,” says Murphy.